Taxpayer-backed
lenders Royal Bank of Scotland and Lloyds Banking Group will reveal
the impact of another year of scandal when they report further big
losses.

Left
reeling from Libor rigging revelations and an ever increasing bill
for mis-selling claims, results from RBS and Lloyds are likely to
confirm a lengthy road to recovery ahead for the part-nationalised
players.

Barclays
has already set the scene with its results earlier this month
detailing another £2.5bn to cover the costs of mis-selling in
2012, which came on top of its £290m settlement for Libor
fixing.

Fresh
from agreeing its own settlement for the Libor scandal, RBS is the
first to report annual figures next Thursday.

Bonuses
are likely to be high on the agenda once more, with the bank set to
confirm the size of the pool that will be shared among staff.

It
has already announced that around £300m will be taken from
its staff bonus pot and clawed back from previous awards to help pay
for its £391m in Libor fines.

The
remaining bonus haul is likely to be much less than the £785m
paid out for 2011, which included £390m for investment
banking staff.

Chief
executive Stephen Hester said last year he would waive his annual
bonus following the bank's IT meltdown, but he is in line for around
£780,000 in shares next month as part of a reward scheme for his
performance in 2010, which can be cashed in 12 months later.

Banking
analyst Ian Gordon at Investec Securities is expecting compensation
provisions for mis-selling to plunge RBS even deeper into the red
with losses of £3.9bn in 2012 - far worse than the £766m loss reported for 2011.

RBS,
which is 81 per cent owned by the State after a £45.5bn bailout at the
height of the financial crisis, disclosed in November that it was
taking an additional £400m in claims relating to payment
protection insurance.

It
also revealed another £50m to cover its computer system
failure, which left millions of people without access to their bank
accounts, while it is facing further financial pain as the scandal
unfolds over mis-selling of interest rate swap products to small
businesses.

The
bank only recently admitted it would have to "meaningfully
increase" the £50m currently set aside for swaps.

On
an underlying basis, the bank is likely to show further improvements
with core profits of £6.3bn up from £6bn in 2011,
according to Mr Gordon.

He
said the investment banking division is likely to show higher profits
under boss John Hourican, although he is carrying the can for the
Libor scandal by stepping down and forfeiting around £9m
bonuses and long-term incentive shares.

Mr
Gordon said the overall increase in core profits would be
"underwhelming" and a sign of difficulties in increasing
corporate and personal lending, which account for around two thirds
of earnings.

The
results come amid political pressure for RBS to be returned to the
private sector after Prime Minister David Cameron urged RBS bosses to
"accelerate" the process of strengthening the company in
preparation.

Taxpayers
are still sitting on a paper loss of around £14bn as shares
remain below the £5 break even price paid by the Government.

There
is also speculation that RBS has hit further troubles in trying to
offload the 316 branches to appease EU rules on State aid.

Following
the collapse of the sale to Santander, RBS is now said to be looking
at selling a minority stake to private equity and institutional
investors to kick-start the auction process.

Lloyds,
which follows with its results on Friday, is also facing rumours over
its branch sale amid doubts the deal with The Co-operative will
succeed in time.

Bonuses
will also be in sharp focus for the group, which is 39 per cent owned by the
Government, after reports suggested chief executive Antonio
Horta-Osorio could be in line for as much as £4.4m.

It
is thought the bank may be seeking to defuse a looming row over pay
by holding back the award until shares are above the average price
paid by the State under the bank's 2008 bailout.

With
shares at just under 56p, they are still well below the average price
of 74p, or around 64p when fees paid by Lloyds to the Treasury are
taken into account.

Most
analysts are expecting pre-tax losses of £544m for 2012 after
mis-selling charges, although Mr Gordon is pencilling in a £1.4bn loss.

He
is expecting another £700m in PPI provisions in the fourth
quarter alone, with around £200m for interest rate swaps.

This
would come on top of the £1bn PPI charge in the third quarter,
which took its total to £5.3bn and pushed Lloyds into a £144m loss in the three months to September 30.

But
stripping out the cost of PPI, the group doubled its underlying
profit to a better-than-expected £840m in the third quarter
as it slashed bad debts and narrowed losses from its non-core
businesses.

This
is likely to be confirmed at the full-year stage, with analysts
forecasting underlying pre-tax profits of £2.4bn, up from £638m in 2011.

The
bottom line losses would also be an improvement on the £3.5bn
slump in 2011.

"It's
an improving story, which will become more visible as the legacy
issues drop out," said Mr Gordon.

He
believes the bank will return to profits on a reported basis this
year as retail margins increase, but said the recovery will be slow
and muted.

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